New Zealand Gathers Pace as Dairy Farmers Fuel Trade

By Matthew Brockett -
Feb 26, 2014

Record payments to dairy farmers and
a China-led trade turnaround added to evidence New Zealand will
outpace developed-world peers this year, cementing bets the
central bank will raise interest rates in two weeks.

Fonterra Cooperative Group Ltd. (FSF), the world’s biggest dairy
exporter, increased its forecast milk payout to farmers to a
record today as data showed demand from China helped New Zealand
record its first 12-month trade surplus in almost two years. A
separate report showed the highest level of immigration in a
decade, while the national airline posted record first-half
earnings.

“The economy is doing extremely well,” Air New Zealand
Ltd. Chief Executive Christopher Luxon said on a conference call
from Auckland. “We see it in the regions, we see it in the
numbers. We’re feeling very, very confident.”

Dairy exports to China, inward migration and the rebuilding
of earthquake-damaged Christchurch are all combining to drive
one of the fastest rates of economic growth in the developed
world. With inflation pressures mounting, the Reserve Bank of
New Zealand is poised to start raising rates from a record low
on March 13, fueling gains in the local dollar.

The so-called kiwi jumped a quarter of a U.S. cent today
after Fonterra raised its forecast payout to farmers to NZ$8.75
per kilogram of milk solids, citing strong demand for milk
powder. The currency traded at 83.30 U.S. cents at 3:12 p.m. in
Wellington, just five cents below its post-float record.

‘Massive Impulse’

“The expansion is pretty broad based, driven by multiple
factors, and dairy revenue is a big one,” said Doug Steel, an
economist at Bank of New Zealand in Wellington, who estimates
dairy income will jump by NZ$5.6 billion ($4.7 billion) this
season, the equivalent of about 2.6 percent of gross domestic
product. “Obviously that’s a massive impulse to incomes, the
economy, and to narrowing the current account deficit, as we’ve
seen in the trade accounts,” Steel said.

Exports to China soared 92 percent in January to NZ$1.2
billion, helping New Zealand post its first 12-month trade
surplus since March 2012, Statistics New Zealand said today.
Sales to China, New Zealand’s biggest trading partner, jumped 54
percent in the year through January to NZ$10.6 billion.

Separately, the statistics agency said permanent
immigration was 25,666 in the 12 months ended January, the most
since April 2004.

Company Earnings

Accelerating economic growth is boosting earnings and
pushing business confidence to a 15-year high.

Firms including Fletcher Building Ltd. (FBU), Steel & Tube
Holdings Ltd., Skellerup Holdings Ltd. and Auckland
International Airport Ltd. posted increased profits last week.
Air New Zealand today reported first-half normalized pretax
earnings rose 29 percent to NZ$180 million and predicted a full-year result of more than NZ$300 million, with Luxon saying the
airline is entering an “aggressive growth phase.”

By contrast, Australian carrier Qantas Airways Ltd.
reported a first-half loss of A$252 million ($226 million) today
and said it will cut 5,000 jobs.

New Zealand’s economy will outpace those of Australia,
Germany, the U.K. and the U.S. this year, according to November
forecasts by the Organization for Economic Development and
Cooperation.

Economic growth will accelerate to 4.2 percent this year,
Westpac Banking Corp. predicted this month, propelled by the
NZ$40 billion rebuild of Christchurch and record-high terms of
trade.

Capacity Constraints

BNZ’s Steel said while risks to the economic outlook are on
the upside, there are some concerns that a tightening labor
market will make it challenging for companies to meet demand.

“One of the issues we see is the ability to find the
resources to actually make this growth happen,” he said. “The
labor market looks to be tightening as we speak. So while the
demand impulse is there, it might be a bit of a challenge to get
on and do it.”

Markets are certain that RBNZ Governor Graeme Wheeler will
raise the Official Cash Rate from 2.5 percent on March 13,
according to interest-rate swaps data compiled by Bloomberg.
There’s an 89 percent chance of a quarter-point increase and an
11 percent likelihood of a half-point move.

“The OCR needs to move up soon,” senior ANZ Bank
economist Mark Smith wrote in a note to clients. “We envisage
75 basis points of hikes over the first half of 2014, starting
in March.”